The Summer of Inscriptions#
Previously, everyone was speculating about which sector the bull market would start from—social, gaming, or ZK? Now, there should be no suspense; it is undoubtedly "Inscriptions."
However, how to view "Inscriptions" seems to be a confusing matter. Builders, investors, old OGs, and new retail investors all have different opinions. For a long time, I was indoctrinated with the misconception that "Inscriptions are a new way of asset issuance, akin to the frenzied pump of MEME coins," leading to a misunderstanding until I read the articles by Teacher Wang Feng (@wangfeng_0128) and jolestar (@jolestar), which made me realize the true meaning of Inscriptions.
In this article, I will explain why "the essence of Inscriptions is actually a third type of token form SFT that is distinct from NFTs and FTs" and the $ORDI valuation model that arises from this understanding, and finally, I will comment on several common misconceptions.
What is SFT#
For a long time, we have formed several fixed perceptions about tokens. Tokens are generally divided into two types: FT and NFT.
Fungible tokens, abbreviated as FT, refer to tokens that are interchangeable. The term "fungible" means "interchangeable." As the name suggests, the characteristic of FT is that any two units of the token are completely identical and can be exchanged for one another, making them "homogeneous" overall. Since FT directly corresponds to units of value in the real world, such as currency, common stocks, and points, and can be easily understood through addition and subtraction calculations, it emerged first. As early as 2015, when Ethereum was just launched, Vitalik Buterin proposed the idea of implementing FT through smart contracts, and Fabian Vogelsteller proposed the ERC-20 standard in November 2015. After 2016, ERC-20 became the most widely used and well-known token standard, opening up a massive industry worth hundreds of billions of dollars.
Non-fungible tokens, abbreviated as NFT, are the antonym of FT in every aspect. Any two units of FT are completely identical and interchangeable, while each NFT is unique, one-of-a-kind, irreplaceable, and cannot participate in calculations. FT represents an abstract unit of quantity, while NFT represents specific digital items, such as virtual artworks, domain names, music, game equipment, and so on. To express their uniqueness, each NFT has its own unique ID (determined by the contract creation address and serial number) and metadata. The main standard for NFTs is ERC-721, proposed in January 2018 by William Entriken and others. The first three years of NFTs can be described as a silent supporting role. It wasn't until 2021, with the explosion of crypto art, that the NFT industry suddenly surged. In the first five months of 2022, the new asset scale of NFTs reached $36 billion. Today, NFTs are considered one of the most important infrastructures of Web3 and the metaverse.
SFT, or semi-fungible token, is a new type of token that stands alongside FT and NFT as a third type of universal digital asset. As the name "semi-fungible" suggests, it lies between FT and NFT, capable of being split for calculations while also possessing uniqueness.
It is important to note that because BTC lacks smart contract functionality, previous token issuances have been defined from the perspective of the ETH tech stack. For example, the token standard for FT is ERC20, and the token standard for NFT is ERC721. So what about SFT? The team at Solv Finance, led by Teacher Meng Yan (@myanTokenGeek), proposed the ERC3525 standard in September 2022, which first defined the SFT token standard in the ETH ecosystem.
Although the ERC3525 in the Ethereum ecosystem was proposed nearly a year ago, it has not stirred much in the market. One reason is certainly the bear market, but another reason is that the SFT tokens issued in collaboration with Solv are financial assets of some institutions, or belong to the bond market, aimed at institutional traders and unrelated to ordinary retail investors.
How to Issue FT on the BTC Chain?#
Before various smart contract platforms emerged, many people had already experimented with issuing FT and NFT on the BTC chain. The most famous among these is the Colored Coins scheme.
Colored Coins refer to a set of technologies that use the Bitcoin system to record the creation, ownership, and transfer of assets other than Bitcoin. They can be used to track digital assets and tangible assets held by third parties and facilitate ownership transactions through colored coins. The term "colored" refers to adding specific information to the Bitcoin UTXO to distinguish it from other Bitcoin UTXOs, thereby introducing heterogeneity among homogeneous Bitcoins. Through colored coin technology, the issued assets possess many characteristics similar to Bitcoin, including preventing double spending, privacy, security, transparency, and censorship resistance, ensuring reliable transactions.
It is worth noting that the protocol defined by colored coins is not implemented by general Bitcoin software, so specific software is required to recognize colored coin-related transactions. Clearly, colored coins only have value within communities that recognize the colored coin protocol; otherwise, the heterogeneous colored coins will lose their colored attributes and revert to pure satoshis. On one hand, colored coins recognized by small-scale communities can leverage many advantages of Bitcoin for asset issuance and circulation; on the other hand, it is almost impossible for the colored coin protocol to merge into the maximum consensus of the Bitcoin-Core software through a soft fork.
The Mastercoin project conducted an initial token sale in 2013 (what we now call an ICO or initial token sale) and successfully raised millions of dollars, which is considered the first ICO in history. The most famous application of Mastercoin is Tether (USDT), which was initially issued on the Omni Layer as the most well-known fiat stablecoin.
The biggest difference from Colored Coins is that Mastercoin only publishes various types of transaction behaviors on-chain and does not record related asset information. In Mastercoin nodes, a state model database is maintained off-chain by scanning Bitcoin blocks. Compared to Colored Coins, the logic it can accomplish is more complex. Moreover, since it does not record state and verification on-chain, its transactions do not require continuity (continuous coloring). However, to achieve the complex logic of Mastercoin, users need to trust the state in the off-chain database of the nodes or allow Omni Layer nodes to perform verification.
How to Issue NFT on the BTC Chain?#
The above two protocols mainly issue FT assets based on the BTC chain. For NFT assets, we must mention Counterparty.
Counterparty was launched in January 2014, initially as a platform for FT financial asset tokens, but soon became the source of some of the earliest NFTs, such as Spells of Genesis, Rare Pepes, and Sarutobi Island. In Counterparty, you must forfeit a special Counterparty transaction to transfer the ownership of a token. Counterparty nodes will parse the data of this transaction off-chain and then update a ledger/database stored in the Counterparty node. This is accomplished using OP_RETURN, a method for storing arbitrary data in Bitcoin transactions (thus allowing data to be stored in the Bitcoin blockchain).
The real explosion of Counterparty occurred after the release of 1,774 NFTs in the Pepe the Frog series. Collectors used Counterparty wallets to store these NFTs, while Counterparty used OP_RETURN outputs to anchor the indexes of these NFTs to the Bitcoin blockchain. The data size limit for OP_RETURN outputs is 80 bytes, which is just enough for Counterparty to include the description, name, and quantity of the NFT (but for ordinal NFTs, the only limitation on data size is the size limit of Bitcoin blocks, which we will discuss later).
In addition to using OP_RETURN, BTC itself is also evolving. The technological changes brought by the SegWit (2017) and Taproot (2021) updates have paved the way for the launch of Ordinals.
The Ordinals protocol is essentially created for NFTs that exist in the Bitcoin ecosystem. In January 2023, Casey Rodarmor introduced Ordinals, describing them as electronic artworks. Its principle is also quite simple. Satoshi (sat) is the smallest unit of Bitcoin, named after Bitcoin's creator, Satoshi Nakamoto. Since one Bitcoin has 100 million sats, each sat is worth 0.00000001 BTC. When all 21 million Bitcoins are mined, there will be 21 trillion sats. Typically, each sat is indistinguishable from other sats. Since each sat is equivalent to another sat—and can be exchanged at equal value—they are considered interchangeable.
The Ordinals protocol is a system that can distinguish and track individual sats. When a new Bitcoin block is mined and new Bitcoins are created as mining rewards, the protocol assigns a unique number to each Bitcoin based on its mining time, with smaller numbers corresponding to earlier sats.
When transactions occur, the Ordinals protocol tracks each transaction in subsequent transactions on a "first-in, first-out" basis. The numbering of sats is called Ordinals because the identification and tracking mechanism depend on the chronological order of creation and transactions. Once a sat is identified by the Ordinals protocol, users can inscribe any data onto the sat to give it unique characteristics, defined as crypto art. This functionality was only made possible after the SegWit (2017) and Taproot (2021) upgrades to Bitcoin Core.
When an Ordinal is inscribed, Inscriptions are bound to a special type of taproot code. Although this method imposes more restrictions on storing arbitrary data on Bitcoin, it allows Inscriptions to contain more and larger data. Creating Inscriptions and interacting with them requires running a full Bitcoin node and a special wallet that supports Ordinals. Ultimately, we have
Ordinals + Inscriptions = NFTs
The Ordinals theory can be imagined as a way to observe the Bitcoin blockchain through special goggles, allowing users to create, view, and track additional information associated with each sat.
So the final question arises: how do we issue SFT assets based on the BTC chain?
The Essence of Inscriptions Tokens is SFT#
The BTC chain lacks smart contract functionality, so any asset issuance must use scripts like OP_RETURN or TAPROOT. Therefore, theoretically, there are two ways to issue SFT:
- "Add" some "uniqueness" on top of FT tokens,
- "Add" some "fungibility" on top of NFT tokens.
Thus, BRC-20 tokens were born, utilizing the second method. As mentioned in the previous chapter, "users can inscribe any data onto a sat to give it unique characteristics," so inscribing a piece of text makes it a text NFT (corresponding to Loot on Ethereum), inscribing an image makes it an image NFT (corresponding to PFP on Ethereum), and inscribing a piece of music makes it an audio NFT. What if we inscribe a piece of code, and that code is for "issuing FT fungible tokens"?
BRC-20 achieves the issuance of tokens, minting, and transferring tokens by utilizing the Ordinals protocol to set inscriptions in JSON data format. The JSON contains executable code snippets that can be implemented on the Bitcoin network, describing various attributes of the token, such as its supply, maximum minting capacity, and unique code.
Thus, we see what seems like a strange thing: when inscribing, it is "one," and this one is 100% an NFT, while "one" can also be split, allowing the homogeneous tokens inside to be distributed one by one. This is somewhat similar to the concept of "wholesale and retail" in the real world, which is why some people believe "Inscriptions are splittable NFTs." However, this combination of NFT and FT attributes is precisely what we referred to earlier as SFT!
Domo (@domodata) inadvertently achieved the issuance of SFT assets through this seemingly primitive technical method without using smart contracts, which is truly a remarkable feat!
How to Issue SFT on the ETH Chain?#
In the previous discussion, we briefly talked about how non-smart contract public chains (BTC chain) issue FT and NFT. For smart contract platforms like Ethereum, everyone is quite familiar with how to issue FT and NFT, which are the common ERC20 and ERC721 tokens. So the question arises: how do we issue SFT on the ETH chain? There are two token standards to choose from: ERC-1155 and ERC-3525.
ERC-1155 is a multi-token standard. Based on its essence, we prefer to call it a multi-instance NFT standard. It is suitable for a relatively narrow application scenario, where the same NFT has multiple identical instances. Note that they must be completely identical; there cannot be any difference at all.
ERC-3525 is a semi-fungible token standard, which is a universal standard with a very broad applicability. It can recognize multiple similar but not identical tokens as "similar" and then allow special operations such as mutual transfers among similar tokens. In effect, it allows for mathematical operations such as merging, splitting, and fragmentation among similar tokens.
The main difference between the two lies in the definition of "similar."
- ERC-1155 considers similar objects to be completely identical; any difference disqualifies them as similar.
- ERC-3525 allows similar objects to coexist with differences, where their key properties are the same, but non-key properties can vary.
For SFT tokens that merely possess MEME attributes, ERC-1155 is sufficient. For assets with more financial attributes, ERC-3525 is more suitable. Unfortunately, neither ERC-1155 nor ERC-3525 has seen large-scale use in the Ethereum ecosystem; only a few institutional users have issued a small number of debt-related SFTs.
Why Did Inscriptions Succeed?#
Inscriptions are a broad and generalized term, originally defined as "a piece of content inscribed on the chain." Looking back at history, we can clearly see that the NFT version of Inscriptions was not considered successful, and the ripples it caused were minimal. The focus of discussion at that time was whether it was worthwhile to issue NFTs based on the BTC chain after the existing smart contract version of NFTs (ERC-721).
Drawing on the concept of fully on-chain games, we can introduce the concept of fully on-chain NFTs. It is well-known that NFTs based on Ethereum's ERC-721 only store the address of the image or content in the metadata; if the content is placed on traditional cloud servers, this address is a web link, and if the content is stored in distributed storage, this address is a hash value. No wonder Musk has always mocked NFTs by saying, "At least encode the small image onto the blockchain." Therefore, we say that NFTs on Ethereum are "off-chain stored content, on-chain stored addresses." If centralized storage servers or distributed storage servers disappear, then NFTs will also disappear.
In contrast, the NFT version of Inscriptions is truly a fully on-chain NFT, with content directly stored in the BTC chain space, merely using ordered sats to point to the content. This is indeed an advantage, but this advantage alone is not enough to convince everyone. So before March, Ordinals NFTs were lukewarm, merely a small image market making minor waves, until the emergence of BRC-20.
I believe the success of BRC-20 can be attributed to the following reasons:
- BRC-20 implemented the issuance of SFT assets on a non-smart contract public chain using a clumsy method. The SFT token is a new asset form distinct from FT and NFT, which is the most essential reason for its success (Ordinals NFTs were not successful in the early stages).
- BRC-20 adopted a fair issuance principle, distinguishing it from the "VC model" in the Ethereum ecosystem, allowing it to open the market through a broader wealth effect in a short time, triggering FOMO (a stark contrast to Solv Finance).
- The leading SFT token, ORDI, is a MEME coin with experimental properties, and this token without an intrinsic valuation model brings more imagination (or consensus value).
- SFT combines the dual advantages of FT and NFT, allowing it to directly utilize existing FT and NFT infrastructures. Thus, we find that Inscriptions tokens can be traded like NFTs on NFT trading markets such as OpenSea, as well as on centralized exchanges like Binance and OKX, and even on DEXs like Uniswap. In the initial stage, trading as NFTs has low liquidity characteristics, making price increases (pumps) easier, while after being listed on centralized exchanges, there is a massive influx of liquidity funds to support it, reaping all the benefits.
- It has absorbed the overflow funds from the BTC ecosystem. For a long time, BTC holders wanting to participate in DeFi, NFTs, gaming, and social activities on-chain could only do so through cross-chain operations; now there are finally native BTC products to engage with.
The Valuation of ORDI#
$ORDI is the first SFT token in the BTC ecosystem and is inherently a MEME asset, so it does not have an intrinsic valuation model. In other words, the only limit is your imagination. However, we can still make an estimate by reviewing the leading NFT market, BAYC.
BAYC has always been the leading NFT token project, similar to a fair sale (low-cost minting), then skyrocketing thousands of times, reaching a peak market value of approximately $4.6 billion in May 2022.
As the first token of BRC-20, $ORDI can be minted for free with just a small gas fee and then skyrocketed thousands of times. Its current price (December 2023) stabilizes at $70. Assuming ORDI continues to maintain its leading position as an SFT token in the future, the peak of the bull market can at least align with BAYC's market value, at which point the unit price would be $220. However, since $ORDI can be traded on centralized exchanges, its liquidity is far higher than that of NFTs like BAYC (many players who purely speculate on coins will only trade on centralized exchanges and will not use wallets), so reaching a total market value of 3-5 times that of BAYC is also acceptable. Thus, we have the following table:
This horizontal comparison valuation method is certainly quite rough; it's just for reference, as prices are determined by sentiment when the time comes.
Several Misconceptions#
Blind men touching an elephant: when a new thing appears with many new characteristics, everyone may only see a leg of the elephant or its long trunk, but never think that is the entirety of the elephant. In the past six months, I have seen many explanations from people, and many of their views have misled my understanding until I read the articles by Teacher Wang Feng and jolestar, which finally made me truly understand the essence of Inscriptions.
-
Inscriptions are a new way of token distribution.
This understanding is completely incorrect. The so-called "inscription" is merely uploading a piece of content to the blockchain space. This method of inscription has existed for years, and even a few mining pools have offered related inscription services. Moreover, when Ordinals first inscribed NFTs, it did not gain popularity; it was the change to inscribing JSON format fungible tokens that became popular. Therefore, the correct understanding should be: Inscriptions tokens are a new type of token form, SFT. -
Inscriptions are just a capital pump like MEME.
This view reflects my previous understanding, which is both right and wrong. After all, the bull and bear cycles of the entire web3 are too obvious; any sector, including previous DeFi and NFTs, follows a cycle of "narrative + pump + dump" over four years, and ORDI does indeed have MEME coin attributes. However, this understanding only sees the first leg of the elephant and fails to recognize the essence that "Inscriptions tokens are a new token form SFT," which is a generalization. -
Inscriptions are a backward technology, a regression.
This view is half correct and half wrong. Among current public chains, the BTC chain without smart contracts and the ETH chain with smart contracts should not be conflated. For the BTC chain, the only way to issue SFT seems to be through BRC-20 or similar protocol variants. However, for smart contract public chains, issuing SFT in the form of inscriptions is indeed a regression from a technical standpoint, as there are better ERC-1155 and ERC-3525 standards, which can only be seen as speculative hype. -
Inscriptions are a counterattack from the BTC ecosystem against the ETH ecosystem.
This view is half correct and half wrong. The ETH ecosystem already has SFT standards, but they have not developed due to the participation of only VCs and institutions, which have not benefited retail investors. Retail investors can only choose BRC-20 protocol tokens issued through fair sales in the BTC ecosystem, which is both a resistance to VCs and a challenge to the "orthodoxy" of Ethereum. However, this "resistance" is merely the second leg of the elephant, not the elephant itself, so one should not generalize. -
Inscriptions are like carving flowers on gold.
This view is both right and wrong. If BTC is compared to digital gold, this metaphor is vivid, but it still overlooks the essence that Inscriptions tokens are a new asset form, SFT, which is a generalization.
Through the above discussion, we can see that the essence of the Inscriptions sector is an explosion of a new type of token form, SFT. For non-smart contract public chains, SFT can only be issued through methods like BRC-20 as a "memo field," while for smart contract public chains, there are two ways: one is to call the VM to issue using smart contracts, and the other is to issue using the "memo field" without calling the VM. In the next article, we will explore the two evolutionary directions of "Inscriptions tokens": recursive inscriptions and smart inscriptions.
This article is originally by @hicaptainz
Follow the author, and you won't get lost in web3.
References
https://foresightnews.pro/article/detail/36629
https://www.theblockbeats.info/news/33844
https://www.chaincatcher.com/article/2105332
https://www.mytokencap.com/news/429220.html
https://www.bitget.com/zh-CN/news/detail/12560603860470
https://www.gate.io/zh-tw/blog_detail/1558/the-next-trillion-dollar-market-what-is-sft